Insurance Australia
Group has placed its British operations under review, paving the way for a possible sale of the insurance giant’s loss-making business.

Chief executive Mike
Wilkins
said that the improvement in IAG’s UK arm, along with the current condition of the British economy, meant that “the time is right to consider our longer­-term plans for the ­business".

The group has appointed advisory firm Evercore Partners to oversee the review. IAG’s options include improving the existing business, focusing more on motor insurance or selling part or all of the business.

This comes after the UK operation, which IAG said had a book value of $550 million, made a $5 million loss in the six months to December 31, 2011, a vast improvement on the $121 million loss reported in 2010.

AFR
AFR

IAG management said in February that the UK business would be close to breaking even for the full year.

Analysts have applauded the strategic review, with many pointing to a sale as the best outcome for the company. CLSA insurance analyst Jan van der Schalk said the review was “absolutely the right thing to do" as the UK arm did not fit with IAG’s current strategy of tapping local and Asian growth.

“My view is they should aim to sell it. In fact, it will remove one of the potential drags on the stock.

“But it really has to be a clean sale, which entails no obligations on the part of IAG going forward," he said.

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Commonwealth Bank analyst Ross Curran noted the timing of the review was “better late than never" and said the UK venture had been a “disaster from the beginning".

“We struggle to see this business ever covering its cost of capital and think the sooner they exit the position the better," he said.

Deutsche Bank analysts are also gunning for IAG to dispose of the asset, calling it the “most preferred option" if a sale price at its book value can be achieved. Retaining all or parts of the UK business might “make sense" after the UK government moved to address claims inflation-related issues, but improved visibility around profitability could be a draw card for potential buyers.

IAG bought Equity Insurance Group, a commercial and personal lines insurer in the UK, about six years ago. The business includes motor insurer Equity Red Star and broking arm Equity Direct Broking.

A key challenge for IAG if it opted to find a suitor for its UK arm was a lack of willing buyers for the motor assets, Deutsche said.

Mr van der Schalk singled out fellow insurance giant QBE and former IAG UK managing director Neil Utley, who along with private equity firms sold the Equity business to IAG in late 2006, as possible buyers.

Morningstar head of equities research Peter Warnes, who also supports a sale, said QBE “may be interested" if the price was right.

Mr Wilkins said one of the insurer’s key priorities was to return the UK arm to profitability.

“Given the progress towards that goal in the opening half of this year, we believe the time is right to consider our longer-term plans for the business and the best way to maximise shareholder value," he said.

IAG’s review of its UK arm comes as the insurance giant focuses on Asia for growth. The group has targeted six countries – Thailand, Indonesia, China, India, Malaysia and Vietnam – for expansion.